There is a disturbing trend happening in Canada, one this writer has seen before.Inflation.It is particularly disturbing to Canadians because of the global credit crisis and the complicity of Canadian Banks in that quagmire.
Again we are being bombarded with numbers by Stats Can telling us that all is well on Bay Street and that may be so, but it definitely isn't that way with the Canadian consumer.The problem with inflation figures released by Stats Can is that they are skewed and misleading.I have discussed this before in another article.Canadians are being told that the economy is doing just fine but their bank accounts are telling them otherwise.Here are just a few of the man on the street indicators.
Increased credit balances
Increasing energy costs.
Increasing utility costs.
Increasing gasoline costs.
Increasing grocery costs.
Increasing interest rates.
Increasing healthcare costs
Increasing education costs.
Increasing travel costs.
Increasing costs of recreation
Increasing unemployment
Shrinking GDP
It all adds up and it definitely impacts all Canadians regardless of socioeconomic position.Certainly some will be in a better position to withstand these pressures than others and certainly those who are not in comfortable financial positions will pull back their spending.They will have no choice.Unfortunately, they are in the majority.
This withdrawal of spending will only shrink the economy more.The reactions of business can either aggravate the problem or they can fight it.That is a choice only they can make.The natural response of the Central Bank is to increase interest rates to fight inflation; a tactic that has proven time and again to only fuel it until it hits what is known as an elastic limit.Historically, only government action through prudent fiscal planning has been able to fight inflation.
The announcement of the banks to increase their lending rates on fixed mortgages has signaled their unwillingness to consider inflation in Canada.It has however signaled their desire to cover their losses in the global markets due to the Subprime Mortgage Crisis in the US.In short, they got caught with their pants at their ankles and now they expect Canadians to make up for the losses they incurred while playing at the global roulette wheel.Canadian economy be damned.Here is a little history to prove my point.Now it is necessary to understand that their profits are down from previous years; not gone, just down.
The above chart shows that the Central Bank Overnight lending rate has dropped 1.50% since December 2007.For the most part the chartered banks matched those rates in lockstep except for the April 22, 2008 drop.The banks did not match it, in fact they delayed any drop in their prime rates for more than a week then only adjusted an average of 0.25% downward.This increased their margin on borrowing.Strangely enough mortgages did not match that 25 basis point drop which again increased the margins on lending and as of June 12, 2008, all of the banks announced increases in their fixed mortgage rates from 50 to 85 basis points.This was done despite the fact that the Bank of Canada made no adjustment to their prime overnight rate.
This move increases the margin on lending once again.Even so, it is still less than it was in December 2007.Could it be that they are counting on the consumer accepting this “lower” rate when applying for their mortgage?Is this a selling point while ignoring the sudden increase?Is this a move to consolidate cash to cover the anticipated losses yet to come from the subprime mortgage markets?
Equally important in this is the fact that the Bank of Canada is reporting an annual inflation rate of 1.7% which is still within the 2% limit however they also warned the federal government of Stephen Harper that energy prices would have to be brought under control or this could easily top 3.1% by the end of 2008.
As consumers we really need to be concerned about this warning.It is not made lightly.This would be a good time to lock mortgages to fixed term closed as a hedge against inflation.Although the economists have said interest rates will not reach double digits, it is worth remembering those same claims being made during the Mulroney years.It is also worth noting that the economists are often employed by the same institutions raising the rates.